Disruption Proof: India’s $55 Bn D2C Sector

One may argue it has come a full circle but not really so. The oldest form of trade and shopping was rooted in what was essentially a consumer-to-consumer model, sporting the spirit of barter. Over time, changes emerged. Modernisation led to newer versions ranging from mom-and-pop stores to shops to organised retail. In its wake, it created an entire ecosystem of the manufacturer, wholesaler, distributor and retailer, finally taking a product to the consumer.

This well-settled structure did need to work hard to stay relevant in a digital-first world. But then struck the digital-only life of the pandemic. Businesses were pushed to cut the clutter, ditch the leaking middle distribution buckets and create more straightforward business models. They had the technology to back it, so there was a genuine case to do so. And it was precisely this situation that birthed the direct-to-consumer (D2C) brands, not only in India but the world over.

Now estimated at a noteworthy USD 55 billion, D2C has moved from D2C ecommerce to include D2C retail, thereby leading to yet another version of C2C, albeit this one is connect-to-consumer. C2C is an entirely new phase of commerce where opportunities to connect exist everywhere. If D2C gave merchants a direct line to consumers, C2C gives endless pathways.

At the same time, these emerging channels have enabled anyone with a good product to be a seller. Boutique coffees, authentic banana chips, homemade beauty recipes, stylish interior décor, and ethnic handicrafts are just some examples of how consumers are buying from other consumers. In this next normal, where the consumer-to-consumer and connect-to-consumer models co-exist in harmony, and C2C circles back into the equation, the opportunity for growth is limitless. 

The Growth Story

In India, the D2C growth story has been much more fascinating than some of its global counterparts. With more than 190 million online shoppers, India has the third-largest digital shopping base. The country is already home to more than 600 D2C brands. 

According to a Modor Intelligence report, the Indian D2C market size was estimated to be at USD 55 billion in 2022. With an expected CAGR of 34.5 per cent during the 2022-2027 period, the total addressable D2C market in India is forecast to hit USD100 billion by 2025.

D2C businesses in India attract attention not only for their meteoric rise but also for the different strategies that enable this sector to be more resilient in the face of uncertainties. Acquisitions and consolidation, monetising India’s Tier-2 and Tier-3 markets, growing newer business verticals and sectors, and making the most of all available channels are coming together to allow businesses to pivot faster and not stagnate.

The Build & Buy Strategy 

Perhaps the most prominent trend in the D2C sector is large-scale consolidation. Companies are keen to take over startups that complement their larger vision, making roll-up models popular. 

The Good Glamm Group acquired beauty and personal care companies such as The Moms Co., Sirona, St. Botanica, MyGlamm, Manish Malhotra Luxury Makeup by MyGlamm, POPxo Beauty by MyGlamm, BabyChakra and Organic Harvest and more to create a multi-faceted group. Nykaa acquired Nudge Wellness, Earth Rhythm, LBB and plans to add more lifestyle brands. 

With brand acquisitions across sectors, the ‘House of brands’ model is growing in D2C. This is also demanding the once D2C purist brands to be present in offline stores as well. “From personal care brands to mattress makers, all are launching exclusive stores as they embark on the next stage of their journey, the ‘click and mortar’ is the only way towards scale and profitability,” says Saroja Yeramilli, Founder and CEO, Melorra.

The strategy does not limit itself to large markets. The game changer lies in the untapped markets. 

Building Bharat 

Tier-2 and Tier-3 cities are the main driving force behind the D2C sales numbers. These markets have a growing appetite that matches the pace of the more mature metro markets. Niche marketplaces can drive brands’ revenues and increase customer acquisition. The significance of these markets can be seen in the Meesho experience last year.

Even though most D2C startups began their online journeys with behemoths such as Amazon and Flipkart, in October 2022 Meesho surpassed Amazon in festive sales to take the second spot in order volume, as per a RedSeer report. This was a result of its penetration in Tier-2 cities. 

This also indicates that shopping behaviour has picked up in markets where retail may still be playing catch up. In a flat India, demand from ‘Bharat’ will only rise and D2C brands will play an important role in fulfilling it.

In November 2022, the Ministry of Information and Broadcasting stated that India has more than 1.2 billion mobile users and 600 million smartphone users. This penetration enables consumers across Tier-1, Tier-2, Tier-3 and beyond to better connect to the urban part of the nation and to be able to shop in a borderless digital ecosystem.

Newer Segments on the Rise 

Some categories such as fashion and accessories, consumer electronics and home decor are more prominent in the D2C space. However, newer segments are emerging.

Given the evolving health-conscious mindset, Indian consumers are keen to make sustainable choices in food and even the likes of clothing. According to a Bain report released in June 2022, sustainability is a growing concern for Indian consumers. 20 per cent of consumers in India are environmentally and socially conscious while 49 per cent are health conscious.

Newer players are entering climate tech, healthy food, pet care and lifestyle, these will grow bigger and big-ticket investments would follow. Discussing the trend of investors’ inclination towards early-stage startups, Karthik Reddy, Blume Ventures comments, “The larger VCs such as Tiger, Sequoia and Accel are doing a little earlier stage. They essentially express under-confidence in either valuation or in the possibility that the later stage bet can become a billion-dollar company. There is the possibility that this early-stage option can become a billion-dollar company.” 

The growing Indian D2C consumers are keen to buy from category-focused and more niche brands. Beauty, skincare, childcare, home décor, FMCG, health-conscious food, sustainability-centric and organic products, apparel, smart wearables and other categories will continue to attract capital and customers. 

D2C early players hold immense potential to attract domestic as well the international capital given the innovative product-market fit. “With the big fund you can play a little bit more boldly in anything which comprises of early-stage risk,” Reddy adds. 

Decacorns In Making 

The omnichannel strategy has opened the door to a multi-channel business model. During the pandemic, brands were forced to adapt to online marketplaces but as the market stabilised, brands began taking offline routes and opening stores to be present wherever their consumer is. Also, consumers feel more confident with physically tried-and-tested products in the store. “Omnichannel is where we will be and where our customers want us to be. It does not have any geographical boundaries; it lets you reach thousands of customers at once and retain loyal customers in your early stages,” explains Ghazal Alagh, Co-founder and CIO of Mamaearth. She added that omnichannel helps brands compete against the distribution networks of giants.

With multiple touch points, an omnichannel presence benefits consumers. Customers experience complete control over their shopping experience as more brands go omnichannel. It also assists businesses in optimising their inventories and developing smarter replenishment practices. Moreover, omnichannel marketing strategies help businesses build an approach that ensures a customer-centric, positive, consistent, and personalised experience on each channel. 

Elaborating on the need for this, Vineeta Singh, Co-founder and CEO, SUGAR Cosmetics, asserts, “We will continue to drive discovery, brand awareness, and brand love digitally, but we will also be available in offline stores because the market is still 85 per cent offline and this will continue for long in India. To crack the Tier-2 and Tier-3 cities, it is important to be available where consumers shop.”

Challenges Continue, So Do Profits

Growing competition and sustaining the profitable path will continue to remain the larger challenges for D2C startups. Another challenge is the constantly evolving shopping behaviour.  For harmonised retail, the D2C brands morphed themselves into an omnichannel presence. The flip side is, the marketing spend for D2C brands is said to be the most cash-burning segment. Bringing down the cost of customer acquisition and retention remains a big challenge for startups in the D2C space. 

“Being primarily a D2C brand, digital media is our key focus, with an emphasis on content marketing. However, we have also explored traditional marketing avenues such as print and TV, when it aligns with our integrated marketing campaign approach,” says Ankit Garg, Co-founder and CEO, Wakefit.co. He shares that the growing popularity of D2C brands has fueled demand. “We now intend to reach Rs 1,200 crore in revenue by the end of FY 2024,” he adds.

More To Come

As players invest in physical stores, the D2C retail business model will also grow in India. This allows for a one-on-one relationship with customers and assists the brand at a broader level, where customers can browse the products while multitasking and shop at the exclusive stores nearby. As a result, it adds more points for consumers to build trust. The connect-to-consumer era itself puts authenticity, loyalty and trust at the heart of every interaction between merchants and consumers opening up a road of longevity for D2C brands.